Investors with an appetite for risk can subscribe to the initial public offering (IPO) from Meghmani Organics being made in the price band of Rs 17-19 per share (face value Re 1). A consistent track record of financial performance and a well-diversified client base for pigments and agrochemicals suggest that the company can deliver secular earnings growth over the next few years. At the higher end of the price band, the offer is priced at about 9 times the likely earnings for FY-08. Despite reasonable earnings prospects, the lack of market fancy for stocks in this sector may curtail the scope for listing gains on this offer.
Meghmani Organics is raising Rs 102 crore through this offer to fund its working capital requirements, set up new manufacturing units for High Performance Pigments and agrochemical formulations, and invest in a subsidiary to finance a 3MW wind power plant. The company's current revenues are derived mainly from domestic as well as export sales of pigments (green and blue) and generic agrochemicals. Exports accounted for about three-fourths of sales in the latest financial year. The key clients for the pigments business are ink, paint and plastic manufacturers both in India and abroad. The company counts global majors such as the Flint Group and Paramount Colors among its clients for pigments and Micro Flo, Valent and FMC Corp as its agrochem clients.
Diversified revenue base
Though Meghmani is only a mid-size player in the pigments and agrochemicals market, the company's revenue base appears well diversified both geographically as well as in terms of customers. The diversified client base ensures low reliance on individual customers (though some are large global players) and the geographic spread of sales reduces market- and currency-related risks.
The outlook for the pigments business appears strong in the light of the improving growth prospects for the paints and inks industry in the domestic as well as the global context.
Entry barriers to this business are relatively high by virtue of the company's specialisation and the customisation involved in the manufacturing process. The outlook for the generic agrochemicals business is less bright. Though the business offers scope for strong volume growth (India being a low-cost manufacturing base), it is subject to persistent pricing pressures. Generic products such as acephate, cypermethrin and imidachloprid, which are the key product lines for the company, have seen steady price declines in recent years.
Meghmani Organics on its part, has managed strong volume and sales growth over the past three years (sales have grown at a compounded annual rate of 23 per cent), despite the pricing pressures. The company's ability to sustain high revenue growth amidst rather sluggish market conditions and fairly intense competition in its businesses, suggests cost competitiveness. At the same time, operating profit margins have hovered at healthy 23-25 per cent levels. The profit growth has however lagged sales expansion, at 11 per cent annualised growth over three years. Though the company has managed strong volume growth, higher raw material costs (several inputs are linked to the crude oil basket) and declines in realisations in the agrochem business have tempered the profit rise.
From here, the company appears well-placed to deliver a 15 per cent earnings growth over the next couple of years, with the help of new manufacturing facilities, an improved product mix, a strong new product pipeline and reduced tax incidence. In the pigments business, it has 12 products at various stages of development. In the agrochemicals business, where the time and regulatory procedures involved in obtaining registrations are the key entry barrier, Meghmani already holds 90 registrations across 50 countries, with over 415 pending registrations. Expansion in the product portfolio would help the company sustain revenue growth and offset pricing pressures in its key businesses.
For the year ended March 2007, the company has managed net profits of Rs 40.7 crore (15 per cent growth) on net sales of Rs 470 crore (21 per cent). This translates into per share earnings of Rs 2.02 on the current equity base and Rs 1.60 on the fully diluted equity base (assuming pricing at the upper end of the band). The offer price, at Rs 19, dilutes trailing 12-month earnings by about 12 times. Despite the reasonable earnings prospects, the low valuation accorded to stocks of specialty chemical and agrochemical majors could be a constraint to significant price gains on this stock.